1 Making Medicaid Planning a Profitable Part of Your Practice Presented by: Valerie L. Peterson, J.D. & Matthew E. Zagula, A.I.F.

2 Who is Appropriate for this type of Planning? Clients who are concerned about depleting their savings should a catastrophic illness occur Clients who are concerned about depleting their savings should a catastrophic illness occur Clients who have recently been diagnosed with an illness that will require significant long-term care Clients who have recently been diagnosed with an illness that will require significant long-term care Clients who are already receiving long-term care at home or in a facility Clients who are already receiving long-term care at home or in a facility

3 Who is Appropriate for this type of Planning? Determining minimum net worth required to fund long- term care Determining minimum net worth required to fund long- term care Gross monthly income from all sources Gross monthly income from all sources Less monthly expenses Less monthly expenses Consider cost of nursing home or ALF Consider cost of nursing home or ALF Given monthly income available, how much principal is needed to generate enough income to cover the facility expense? Given monthly income available, how much principal is needed to generate enough income to cover the facility expense?

4 Determining Minimum Net Worth Needed to Fund Long-Term Care Monthly Income $3000 Monthly Income $3000 Monthly Expenses$2500 Monthly Expenses$2500 Cost of nursing home care:$5500 Cost of nursing home care:$5500 Assets needed to generate $5000/month=$1,200,000 (assuming 5% rate of return) Assets needed to generate $5000/month=$1,200,000 (assuming 5% rate of return)

5 Medicaid – Where to Find the Rules 42 USC 1396p (as amended by DRA 05) 42 USC 1396p (as amended by DRA 05) 42 CFR 430 and 20 CFR CFR 430 and 20 CFR 416 Your Local State Medicaid Manual Your Local State Medicaid Manual Your State Administrative Regulations Your State Administrative Regulations

6 Medicaid – The Basics Income – Determined by each State Income – Determined by each State Assets Assets Between $999 and $4,150 for a Single applicant Between $999 and $4,150 for a Single applicant Married couples with 1 applying - $101,640 (increases January 1) Married couples with 1 applying - $101,640 (increases January 1)

7 Medicaid – the Basics Countable Assets Countable Assets All bank accounts All bank accounts Life Insurance cash value or face value (Federal rules say $1500 or less is ok) Life Insurance cash value or face value (Federal rules say $1500 or less is ok) All investment accounts All investment accounts IRAs (State specific) IRAs (State specific)

8 Medicaid – The Basics Non-Countable Non-Countable Home (limited equity - DRA 2005) Home (limited equity - DRA 2005) Vehicle Vehicle Prepaid Funeral/Burial (may have to be an irrevocable contract) Prepaid Funeral/Burial (may have to be an irrevocable contract) Life Insurance with face value of $1500 or less (State may allow more) Life Insurance with face value of $1500 or less (State may allow more) IRA? IRA? Income Producing Property Income Producing Property

9 Planning Strategies Goal: Reduce countable assets to amount allowed as soon as possible with the shortest penalty possible. Goal: Reduce countable assets to amount allowed as soon as possible with the shortest penalty possible. Penalty period: Period of months an applicant must wait if assets are gifted away or transferred for less than full market value. Penalty period: Period of months an applicant must wait if assets are gifted away or transferred for less than full market value.

10 Understanding the Penalty Period When a gift or uncompensated transfer is made, a period of ineligibility occurs. When a gift or uncompensated transfer is made, a period of ineligibility occurs. How a penalty is calculated: How a penalty is calculated: Amount of the transfer divided by the monthly divisor amount (set by each state) = number of months of ineligibility. Amount of the transfer divided by the monthly divisor amount (set by each state) = number of months of ineligibility. Example: Gift of $50,000 is made in a state which uses a divisor of $5,000. Gift results in a 10 month penalty. Example: Gift of $50,000 is made in a state which uses a divisor of $5,000. Gift results in a 10 month penalty.

11 Understanding the Penalty Period When does the penalty start? When does the penalty start? Depends on whether State has adopted DRA Depends on whether State has adopted DRA Pre-DRA 2005: Penalty starts the month the transfer is made. $50,000 gift made June 25, 2007 – penalty starts the month of June. Pre-DRA 2005: Penalty starts the month the transfer is made. $50,000 gift made June 25, 2007 – penalty starts the month of June.

12 Understanding the Penalty Period DRA 2005: Penalty starts “the first day of a month during or after which assets have been transferred... Or the date on which the individual is eligible for Medicaid assistance under the state plan and would otherwise be receiving institutional level care.. But for the application of the penalty period, whichever is later.” DRA 2005: Penalty starts “the first day of a month during or after which assets have been transferred... Or the date on which the individual is eligible for Medicaid assistance under the state plan and would otherwise be receiving institutional level care.. But for the application of the penalty period, whichever is later.”

13 Understanding the Penalty Period $50,000 gift on June 27, 2007: Penalty will not start until the applicant is financially eligible and is in a nursing home or eligible to receive nursing home level care. $50,000 gift on June 27, 2007: Penalty will not start until the applicant is financially eligible and is in a nursing home or eligible to receive nursing home level care. Look back period under DRA 2005 is 5 years. The gift will be reportable during the 5 year period. Look back period under DRA 2005 is 5 years. The gift will be reportable during the 5 year period.

14 Planning Strategies Pre-Crisis v. Crisis (already receiving care) Pre-Crisis v. Crisis (already receiving care) Pre-Crisis cases often times come in as estate planning clients. It is important to have the conversation about how to pay for long-term care with them and analyze the minimum net worth needed for them to finance their own care. Pre-Crisis cases often times come in as estate planning clients. It is important to have the conversation about how to pay for long-term care with them and analyze the minimum net worth needed for them to finance their own care.

15 Planning Strategies Case Studies Single or Married Couple Health Situation & Background Financial Fact Pattern StrategyResult What you need to consider:

16 Pre-Crisis Planning Pre-Crisis – Roger and Judy Jones Roger and Judy are age 67. Roger has high cholesterol, but Judy is in good health. Roger and Judy are age 67. Roger has high cholesterol, but Judy is in good health. Countable assets include an investment portfolio worth $300,000 and a second home in a different state worth $225,000. Countable assets include an investment portfolio worth $300,000 and a second home in a different state worth $225,000. Their income is meeting their expenses but they are concerned about preserving their assets should one of them become ill. Their income is meeting their expenses but they are concerned about preserving their assets should one of them become ill.

17 Planning Strategies – Pre-Crisis One possible solution: One possible solution: 1) Place $250,000 plus the second home into a Irrevocable Medicaid Trust. Result: $475,000/$5000=95 month penalty. Result: $475,000/$5000=95 month penalty. 2) Purchase a long-term care policy for one or both of them with a 5 year benefit period. Result: All assets protected with no risk. Result: All assets protected with no risk.

18 All Parties Benefit Assets are managed by the referring advisor in the Irrevocable Medicaid Trust. Assets are managed by the referring advisor in the Irrevocable Medicaid Trust. Sale of Long-Term Care Insurance is made (and maybe life insurance). Sale of Long-Term Care Insurance is made (and maybe life insurance). If all assets were not held by the referring advisor, should be transferred to him/her. If all assets were not held by the referring advisor, should be transferred to him/her. CPA is needed for tax return for the Trust, income tax advice, and capital gains advice. CPA is needed for tax return for the Trust, income tax advice, and capital gains advice.

19 Planning Strategies Crisis Case #1 – Craig & Ruth Smalley Immediate Nursing Home Need Ruth is 77 years old and has Alzheimers and needs to go into a nursing home. She is now known as the institutionalized spouse. Craig is 78 years old and is now known as the community spouse.

20 Craig & Ruth Smalley They have countable assets totaling $300,000 They have countable assets totaling $300,000 Since they are a married couple, the Medicaid system divides their total assets by two (in most states), so that each of them has a resource of $150,000. Since Ruth is now an institutionalized spouse, her $150,000 needs to be spent down to $2,000. Which means she has $148,000 at risk. Craig as the Community spouse is allowed to keep only $101,640*, which means that he has $48,360 at risk. *$101,460 (increases Jan. 1)

21 Craig & Ruth Smalley In a crisis planning situation, you must consider the amount of money at risk and systematically go through the exemptions: Do they need home improvements? Does the client need a new car? Should they prepay their funerals? What is the income loss in the event of the death of one spouse? Any of their at-risk dollars can be used to improve their home, buy a car or to pre-pay funerals. They could actually go out and buy a more expensive home, but the value of the new home would be subject to certain limitations under the DRA.

22 Craig & Ruth Smalley Strategies The goal is to reduce and protect your client’s assets. If the previous strategies do not work for the client, in whole or in part, then the healthy spouse may be able to buy a Medicaid qualifying annuity in favor of the community spouse. The annuity must be irrevocable, unassignable, and have no tabular cash value. In essence, under the Medicaid rules and regulations, this money disappears as an asset and becomes an income stream payable to the community spouse.

23 Craig & Ruth Smalley Strategies Some states have add-on rules to the DRA that do not allow for Medicaid qualifying annuities. In those states, you may be able to use what’s called a Medicaid qualifying note, which is very similar to a Medicaid qualifying annuity, but instead of shifting the financial responsibility off to a third- party insurance company, the family retains the responsibility through the note structure.

24 Craig & Ruth Smalley Strategies Utilize all available spend-downs. Purchase a MQA/MQN for Craig, the community spouse, based on his life expectancy of 7yrs / 9 months. Result Immediate Medicaid Qualification

25 Planning Strategies Crisis Case #2 – Sally Book Immediate Nursing Home Need Sally is a 71 year old widow. Her life expectancy for Medicaid purposes is 14 years / 7 months. She is in a nursing home in West Virginia at the skilled care level with monthly costs of $4,350.

26 Case Study – Sally Book Financial Fact Pattern – Income / Expenses Social Security $1,100 Widow’s Pension $ 139 Total Monthly Income $1,239 Monthly - Source of Income Medicare premium & Suppl. Ins. $ 230 Monthly Expenses excluding nursing home care *Based on the above scenario her income for Medicaid planning purposes is $959.

27 Case Study – Sally Book Financial Fact Pattern – Assets List of Assets CD’s $ 50,000 Savings Account $ 26,000 Checking Account $ 4,539 Brokerage Account $ 25,000 Total Asset Base $105,539

28 Case Study – Sally Book Sally is permitted to keep $2,000 of her assets and she owes one full month of nursing home care prior to implementing this strategy. Therefore, her remaining assets that are subject to spend-down are $99,189. Total Assets $105,539 Less 1 month care $ (4,350) Less Allowable Asset Amount $ (2,000) Spend-down Amount $ 99,189

29 Case Study – Sally Book Strategy Create an otherwise eligible for Medicaid scenario by: Gifting $61,044 to children/family, and Placing $38,145 into a MQN payable over 12 $3,178.75/month Result Sally’s income including the Note for 12 months is $4, The cost of care is $4, The monthly shortfall is $212.25, which should be paid by her children/family. Medicaid qualification in 12 months.

30 Planning Strategies Crisis Case #3 – Ralph & Alice Kramer Crisis Case #3 – Ralph & Alice Kramer Immediate Nursing Home Need Immediate Nursing Home Need Alice just suffered a stroke and has become totally incapacitated and needs care at the skilled-care level. Ralph is a healthy 74 year old who worked and saved every month so that he could live comfortably during his retirement. The Kramers reside in Illinois

31 Case Study – The Kramers Financial Fact Pattern – Income / Expenses Social Security: $1,100 $ 450 Pension: $ 400 Total Household Income $1,950 Monthly - Source of IncomeRalphAlice Monthly Expense Nursing Home care: $5,000 per month.

32 Case Study – The Kramers Financial Fact Pattern – Assets List of Assets CD’s $ 45,000 Savings Account $ 15,000 Checking Account $ 3,000 Money Market Account $ 37,000 Total Asset Base (not including residence) $100,000

33 Case Study – The Kramers Strategy File IL Medicaid Application. Identify $100,000 as Ralph’s CSRA Result Immediate Medicaid Qualification